What Does the Future Hold for Houston's Pension Plans?

Maybe you’ve read the headlines about Houston’s eye-popping pension liability, or heard about Mayor Turner’s strategy to close the gap. If you’re under 40, maybe you’ve asked yourself, what the heck is a pension, anyway? Below, we break down the issues impacting our city’s public-employee retirement system, and explain how City Hall officials are hoping to send our workers into their golden years sustainably.

What’s a pension?

Retired firefighters, police officers, and municipal workers all collect monthly retirement checks from the city, for as long as they are living. (In econ lingo, it’s called a "defined-benefit pension.”) The payout is based on the number of years a person works and that person’s salary over his or her final few years on the job. A typical Houston cop with 25 years on the force collects roughly $3,800 each month; a similarly experienced City Hall staffer draws $2,300, give or take.

“Compared to the national average, they are on the high side, but they are not excessively generous,” says Bill Fulton, director of the Kinder Institute for Urban Research at Rice. Houston taxpayers chip in about $350 million per year, which accounts for 20 percent of the total funding; employee contributions and investment earnings make up the rest. Private employers used to offer similar packages, before they discovered cheaper, more portable 401(k) plans.

Are we broke?

The health of a pension system is usually judged by its so-called funding ratio. “You try to calculate what the long-term liabilities are,” says Texas Pension Review Board Chairman Josh McGee. “Then you look at the assets the pension system has, and you compare them.” While Houston is more stable than many cash-strapped municipalities (we’re looking at you, Dallas), the gap between our assets and costs is widening. Blame the Great Recession and overly optimistic predictions about the stock market.

Coming off the roaring ’90s, managers of the police system, for example, estimated their fund would generate an annual return of 8 percent. “Over the last 15 years,” says Fulton, “their return has been something between 6 and 6.5 percent.” When you bet big on the market and miss, it falls on the city to make up the difference.

Houston’s total liability now sits at $7.8 billion—that’s with a B—which means the city owes workers $7.8 billion more in promised benefits than they’ve set aside, in cash or investments, to pay. To steady the ship, sans reforms, would require lawmakers to increase their contribution dramatically, likely forcing both deep service cuts and uncomfortable tax hikes.

How do we fix this?

So what would Turner’s plan, brokered in November, actually do? For starters, the city would drop their assumed rate of return to 7 percent for all three systems. “It’s more honest about the cost,” says McGee. Turner also asked pension board administrators to cut benefits by a cumulative $2.5 billion, mostly through scaling back cost-of-living increases. Meanwhile, City Hall plans to issue a $1 billion pension-obligation bond, a cash infusion they will feed directly into their two most wobbly plans, police and municipal.

Houston’s total liability now sits at $7.8 billion—that’s with a B—which means the city owes workers $7.8 billion more in promised benefits than they’ve set aside, in cash or investments, to pay.

Overriding the whole deal is a provision local lawmakers have dubbed “the corridor.” If the city’s projected contribution rate jumps by more than 5 percent of payroll, for any reason (market crash, pay spike, you name it), pension representatives would be forced back to the negotiating table. The goal is to ensure the funds are fully solvent by 2046.

Will the reforms work?

Turner considers the package “historic, transformative and budget-neutral.” Fulton thinks it’s “politically clever.” The state legislature would still need to approve any reforms in Austin before they could be implemented at home; the city is drafting a piece of legislation proposing the changes, with state Rep. Jim Murphy (R-Houston) as a likely sponsor. “The elements the city has laid out, do they make it to a vote without any changes?” asks McGee. “That’s hard to predict.” And the corridor provision, he adds, “has to be enforceable for this plan really to work.”

Then there’s the city’s assumed rate of investment return, reduced but still rosy, according to Fulton. “The big question is, will they get 7 percent investment returns over time, and if not, what happens?” And how about our retirement-eligible cops (37 percent of the force, per the Chronicle) and firefighters (25 percent)? Will they hand in their two-weeks' notice before benefits are sliced further? The mayor isn’t preoccupied with unintended consequences. As he assured reporters last month, “I’ve spent 11 months on this issue. I think I know it quite well.”